- The earliest date new rules can be put into force would be 2024, says FSA official
- Audits for quarterly “tanshin” reports would reduce access to board and timeliness
Eleven members of a 16-member Japanese government panel tasked with reviewing the need for quarterly disclosure requirements said Japan’s quarterly “tanshin” earnings reports should be made mandatory for publicly listed companies and not kept optional, according to recently disclosed minutes of a meeting held last month.
At a meeting on 5 October, the Financial Services Agency (FSA)’s Disclosure Working Group (DWG) discussed whether quarterly earnings “tanshin” reports should be made mandatory and subject to auditors’ reviews. They also discussed additional information disclosures and matters relating to enforcement actions against misstatements.
The developments come after the panel’s decision earlier this year to abandon compulsory first- and third-quarter securities reports under the Financial Instruments and Exchange Act and instead keep quarterly earnings reports (“tanshin”) under the stock exchange rules. Compulsory audited half-year and annual securities reports (so-called “yuho”), as obliged by law, will remain unchanged.
Japan’s quarterly disclosure rule was introduced by the Tokyo Stock Exchange in 1999 and became mandatory by law in 2008.
The ongoing disclosure rule review is aimed at removing duplication that exists in compulsory results disclosures. Currently, listed companies disclose results every three months based on stock exchange rules and are also required to provide audited quarterly financial statements by law. However, there is overlap in the content of the two reports.
At the council’s meeting on 5 October, many corporate governance experts, including scholars, lawyers, auditors, analysts and investors, said quarterly “tanshin” earnings reports should be made mandatory. Two representatives of corporations were against such a proposal claiming that the frequency of disclosures will not only increase the reporting burden on companies but also encourage short-termism in which companies prioritize market-pleasing profit figures at the expense of investing in sustainable growth.
The panelists, however, were divided over what should be added in quarterly “tanshin” earnings reports. They were also divided over the need for auditor reviews and when and how to take enforcement actions against misstatements for first- and third-quarter “tanshin” earnings reports.
Speaking from the viewpoint of investors, Shizuko Ohmi of JPMorgan Asset Management said, during the panel discussion, that it is preferable for quarterly “tanshin” reports to include segment information and cash-flow statements that are mandatory for half-year and annual securities reports.
At the same panel discussion, Estsuro Kuronuma, professor at Waseda University, and Takayuki Nakano, professor of Hosei University, said in order to secure the trustworthiness of the reports, auditor reviews and enforcement actions against misstatements must absolutely be required for first- and third-quarter “tanshin” reports. This is because the “tanshin” reports will no longer be backed up with audited first- and third-quarter securities reports, which will be abolished following the ongoing review, they said.
However, Ken Kiyohara, another member of the panel and a corporate governance lawyer, questioned the addition of too many ingredients into quarterly “tanshin” reports. He believes auditor reviews are not necessary for quarterly “tanshin” reports arguing that the time-consuming auditing processes would reduce the timeliness of quarterly earnings reports. He said the lack of quarterly "tanshin" reports’ auditor reviews and enforcement actions would be compensated for by existing audited mandatory half-year and annual “yuho” securities reports as well as extraordinary reports (“rinji hokokusho”).
Two business leaders, Atsuko Kakihara of Kawasaki Heavy Industries [TYO: 7012] and Keigo Sasaki of Sumitomo Chemical [TYO: 4005], agreed with Kiyohara saying it is important to maintain the timeliness of quarterly earnings reports. To this end, the compulsory introduction of auditor reviews for “tanshin” would run counter to the direction of greater efficiency and simplification, they said.
Goro Kumagai of the Securities Analyst Association of Japan also stressed the importance of the timeliness of quarterly “tanshin” earnings reports. Kumagai said it is not necessary to introduce auditor reviews and enforcement actions against misstatements for first- and third-quarter “tanshin” reports because listed companies are already required to submit audited half- and full-year securities reports by law.
According to a September survey on quarterly disclosures that was carried out by the Securities Analyst Association of Japan, 66% of the respondents said first- and third-quarter earnings “tanshin” reports should be made mandatory for all listed companies. Whilst 56% of the respondents said auditor reviews are not necessary to maintain the timeliness of the quarterly earnings reports, 73% said auditor reviews for compulsory half-year securities reports should remain.
Earliest date new rules can be applied is 2024
According to a Financial Services Agency (FSA) official, the Japanese government panel is expected to draw up a final recommendation by this autumn, which is likely to be followed by the government’s submission of legislation to parliament to amend the Financial Instruments and Exchange Act and the Tokyo Stock Exchange (TSE) rules in 2023. The official said the earliest date new rules can be applied is 2024.
A Tokyo-based corporate governance lawyer, who is also an outside director at a TSE Prime Market listed mining company, said the company’s board members have been keenly watching the direction of the review, which he described as ‘controversial’.
He said, however, even if the government were to decide to leave the disclosure of quarterly “tanshin” earnings reports to the discretion of each company, his company will continue to make disclosures because a massive number of shareholders may divest their holdings if they were to stop quarterly disclosures.
On the other hand, a Tokyo-based long-term institutional investor said that the quarterly earnings system means there are four so-called silent periods each year. And these silent periods pose a problem for investors because it reduces the time during which shareholders can engage with management and directors.